PA SGS 3
Learning outcomes:
Critically compare competing bids for a target company
Have a clear understanding of different ways in which consideration
may be structured
Give preliminary advice to seller in relation to the taxation of sale
proceeds and
Advise on a simple earn-out clause
Pre-SGS prep notes:
What is an earn-out clause? (from Ch1, page 11)
An earn out is where only a part of the consideration is paid on the
date of completion but the buyer agrees that it will pay an
additional amount of consideration at a particular time in the future
(e.g 3 yrs after completion).
This amount to be paid later is an element of deferred
consideration and will depend on the level of profits of the target
company after completion.
This type of arrangement is most suitable where the seller(s) is/are
individuals who are going to continue working for the target
company after completion.
The earn out is likely to help to incentivise the seller(s) as
the greater the profits of the target, the greater the
deferred consideration they will receive.
Tax notes from Tax and Group Structures Workbook, Section 1
Part A: issues for the buyer and seller in a company acquisition
(share sale)
1. Tax implications for the seller
Tax implications for the seller will depend on whether the seller is an
individual / company.
Corporate seller = potential liability to pay corporation tax on the
chargeable gain on the sale of the shares.
Individual seller = potential liability to capital gains tax (CGT) on the
chargeable gain arising on the sale of the shares.
Important to consider the ways in which tax liability on the chargeable
gain may be reduced, deferred or even eliminated altogether.
, Sale by a corporate seller:
1. Substantial shareholding exemption (‘SSE’).
Very important tax exemption that might apply to a company when
it is selling shares in another company.
Needs to satisfy the following conditions
o The selling company must have owned (as opposed to be
disposing of) at least 10% of the ordinary share capital
of the company whose shares are being sold, for at
least 12 consecutive months in the 6 year period prior
to disposal.
o The company whose shares are being sold must be a
trading company or the holding company of a trading
group or sub-group, throughout the period from the
beginning of the 12 month period mentioned above until the
date of sale.
If these conditions are satisfied = any gain on the sale of the shares
IS NOT treated as a chargeable gain, so no corporation tax will
be payable by the corporate seller as a result of the share
sale.
Equally, if a loss is made on the sale, this is not an allowable loss for
corporation tax purposes.
It is possible to apply to HMRC for advance no-statutory clearance
that the SSE will, or will not, apply to a proposed transaction.
Meaning of trading company = company carrying on trading activities
which do not include to a substantial extent activities other than trading
activities. Trading group is defined along the same lines.
Substantial in this context = being more than 20%.
Meaning of trading activities = generally those carried out in the
course of, or for the purposes of, or in preparation for, trade carried on (or
to be carried on) by a member of the group/sub group. Generally excludes
investment companies.
Particular types of transaction:
Where either:
o The disposal is to a connected person (defined for tax
purposes in s.1122 Corporation Tax Act 2010) or
o The trade (by virtue of which the second condition above is
satisfied) has been transferred into a new company within the
previous 12 months
Then the company whose shares are being sold MUST
CONTINUE TO BE A TRADING COMPANY (or holding company of a
trading group/sub-group) immediately AFTER the sale of the shares.
, Hive-downs, an exception:
A hive down takes place when a company transfers assets to a
newly incorporated subsidiary and then sells the shares in that
subsidiary to a buyer.
In this way, the sale of a business can be re-structured as a
share sale.
SSE CAN apply to the share sale in these circumstances, even
though the seller has not held the shares in the subsidiary for 12
months prior, provided that the hive-down assets had previously
been used by the seller, or another company in its group, in a trade,
Where this is the case = the seller can be deemed to have held the
shares in the target for 12 months.
Anti-avoidance provisions:
Anti-avoidance rules denies the exemption where obtaining the
exemption is the SOLE OR MAIN BENEFIT OF THE
TRANSACTION. Beyond scope of module.
Tax deferral on share-for-paper exchange;
Consideration paid to a seller in a corporate transaction might not
all be in the form of cash.
Sometimes part or all of the consideration may be in the form of
paper, i.e buyer may issue shares in itself or loan notes to the
seller.
If SSE = not available, the seller might still be able to obtain
a tax benefit if the consideration is in the form of paper.
Where conditions are satisfied, the seller’s tax liability is effectively
deferred until a later date. Known as holdover/rollover relief.
Rationale? Where the seller has received consideration otherwise
than in cash, it does not have any cash proceeds with which to pay
tax on any gain arising on the disposal.
BUYER SELLER
Buyer will issue shares
in itself / loan notes to
the seller in return for
the Target rather than
cash.
Conditions for tax deferral:
Only applies to a share sale
The buyer must hold, or as a result of the
exchange, will hold, over 25% of the target
company’s ordinary share capital
There must be a bona fide commercial reason for
structuring the payment in shares/loan notes and
It must not form part of a tax avoidance scheme
Learning outcomes:
Critically compare competing bids for a target company
Have a clear understanding of different ways in which consideration
may be structured
Give preliminary advice to seller in relation to the taxation of sale
proceeds and
Advise on a simple earn-out clause
Pre-SGS prep notes:
What is an earn-out clause? (from Ch1, page 11)
An earn out is where only a part of the consideration is paid on the
date of completion but the buyer agrees that it will pay an
additional amount of consideration at a particular time in the future
(e.g 3 yrs after completion).
This amount to be paid later is an element of deferred
consideration and will depend on the level of profits of the target
company after completion.
This type of arrangement is most suitable where the seller(s) is/are
individuals who are going to continue working for the target
company after completion.
The earn out is likely to help to incentivise the seller(s) as
the greater the profits of the target, the greater the
deferred consideration they will receive.
Tax notes from Tax and Group Structures Workbook, Section 1
Part A: issues for the buyer and seller in a company acquisition
(share sale)
1. Tax implications for the seller
Tax implications for the seller will depend on whether the seller is an
individual / company.
Corporate seller = potential liability to pay corporation tax on the
chargeable gain on the sale of the shares.
Individual seller = potential liability to capital gains tax (CGT) on the
chargeable gain arising on the sale of the shares.
Important to consider the ways in which tax liability on the chargeable
gain may be reduced, deferred or even eliminated altogether.
, Sale by a corporate seller:
1. Substantial shareholding exemption (‘SSE’).
Very important tax exemption that might apply to a company when
it is selling shares in another company.
Needs to satisfy the following conditions
o The selling company must have owned (as opposed to be
disposing of) at least 10% of the ordinary share capital
of the company whose shares are being sold, for at
least 12 consecutive months in the 6 year period prior
to disposal.
o The company whose shares are being sold must be a
trading company or the holding company of a trading
group or sub-group, throughout the period from the
beginning of the 12 month period mentioned above until the
date of sale.
If these conditions are satisfied = any gain on the sale of the shares
IS NOT treated as a chargeable gain, so no corporation tax will
be payable by the corporate seller as a result of the share
sale.
Equally, if a loss is made on the sale, this is not an allowable loss for
corporation tax purposes.
It is possible to apply to HMRC for advance no-statutory clearance
that the SSE will, or will not, apply to a proposed transaction.
Meaning of trading company = company carrying on trading activities
which do not include to a substantial extent activities other than trading
activities. Trading group is defined along the same lines.
Substantial in this context = being more than 20%.
Meaning of trading activities = generally those carried out in the
course of, or for the purposes of, or in preparation for, trade carried on (or
to be carried on) by a member of the group/sub group. Generally excludes
investment companies.
Particular types of transaction:
Where either:
o The disposal is to a connected person (defined for tax
purposes in s.1122 Corporation Tax Act 2010) or
o The trade (by virtue of which the second condition above is
satisfied) has been transferred into a new company within the
previous 12 months
Then the company whose shares are being sold MUST
CONTINUE TO BE A TRADING COMPANY (or holding company of a
trading group/sub-group) immediately AFTER the sale of the shares.
, Hive-downs, an exception:
A hive down takes place when a company transfers assets to a
newly incorporated subsidiary and then sells the shares in that
subsidiary to a buyer.
In this way, the sale of a business can be re-structured as a
share sale.
SSE CAN apply to the share sale in these circumstances, even
though the seller has not held the shares in the subsidiary for 12
months prior, provided that the hive-down assets had previously
been used by the seller, or another company in its group, in a trade,
Where this is the case = the seller can be deemed to have held the
shares in the target for 12 months.
Anti-avoidance provisions:
Anti-avoidance rules denies the exemption where obtaining the
exemption is the SOLE OR MAIN BENEFIT OF THE
TRANSACTION. Beyond scope of module.
Tax deferral on share-for-paper exchange;
Consideration paid to a seller in a corporate transaction might not
all be in the form of cash.
Sometimes part or all of the consideration may be in the form of
paper, i.e buyer may issue shares in itself or loan notes to the
seller.
If SSE = not available, the seller might still be able to obtain
a tax benefit if the consideration is in the form of paper.
Where conditions are satisfied, the seller’s tax liability is effectively
deferred until a later date. Known as holdover/rollover relief.
Rationale? Where the seller has received consideration otherwise
than in cash, it does not have any cash proceeds with which to pay
tax on any gain arising on the disposal.
BUYER SELLER
Buyer will issue shares
in itself / loan notes to
the seller in return for
the Target rather than
cash.
Conditions for tax deferral:
Only applies to a share sale
The buyer must hold, or as a result of the
exchange, will hold, over 25% of the target
company’s ordinary share capital
There must be a bona fide commercial reason for
structuring the payment in shares/loan notes and
It must not form part of a tax avoidance scheme
